Several years ago if you were to ask me about SaaS startups and their likely acquirers, I would have rattled off the usual suspects: big software companies that want to get in the space, non software companies that recognize software is eating the world, and the occasional out-of-left-field company that’s making a move. Nowhere on that list is private equity. Now, when people ask who a likely acquirer is for so-and-so startup, private equity is the first thought.
Historically, private equity was known for acquiring profitable companies and either combining them with other similar companies to create more scale or aggressively cutting costs to increase profitability. Regardless, high growth SaaS businesses that burn lots of capital and are rarely profitable in the early years wasn’t the target.
Just in the last few weeks, two high growth Atlanta SaaS startups were recapped (code for new investors coming in and buying out existing investors, ideally at a much higher price than the last round.) The two startups:
- Gather ($55 million valuation) – Venue management software to manage event spaces and private dining rooms in restaurants.
- CallRail ($160 million valuation) – Call tracking software for marketers to understand the ROI of different campaigns.
Previously, these types of startups would have raised large growth equity rounds and continued marching towards a massive exit, ideally being acquired by a strategic or going public. Instead, they decided to put money in their pocket (de-risking their position is the lingo) and bring in new partners to help grow the business. And, as part of growing the business, the goal is to make 3-5x their money in 3-5 years, as different from venture capitalists that shoot for 10x+ returns.
When SaaS startups reach modest scale (at least $5-10M+) with a strong growth rate (>80%), private equity firms will compete aggressively to buy the company.
David Cummings on Startups 
This is a really interesting topic. I’ve often wondered if PE would find a way to make a model work within the startup ecosystem. It makes sense; large pool of potential purchases, lots of startups are often working in blue oceans and/or have a clear differentiator and, as you pointed out, they typically have strong revenue growth.
But PE’s are often most attracted to founder-led businesses in boring industries where they can either cut costs and maximize profits or consolidate businesses to resell in 3-5 years. I’m curious of the following in relation to PEs working in the startup space:
1. Are they still planning on selling their business on a revenue multiple? Or now focused on maximizing EBITDA?
2. How does a culture of “fast-paced growth” and “looking towards the next round of venture funding” clash with a new culture of “sell the business in 5 years for 3x”? Do talented people leave to find the next best thing? That wouldn’t be good.
3. Why would a VC sell their company to a PE? Because the VCs get fed up with slow growth and decide to sell a “zombie”?
Most particularly, I’m really interested to see how the economics play out in PEs acquiring startups. If it works, and PEs are able to make 3-5x their money, I definitely can see an industry growing around this.